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What is Medicare? Here are the basics

At a glance:

  • What is Medicare? Here are the basics

  • How is Medicare paid for?

  • What is Medigap insurance? Here are the basics

  • When to buy Medigap insurance

  • Summary of Medicare

  • Practical ideas you can start with today

Healthcare costs have significantly outpaced the overall inflation rate for years, and recent studies show retiree medical bills have increased about 6% per year for the past decade — even for those on Medicare.

Hence it’s important to understand how Medicare and Medicare supplement ("Medigap") insurance, the two types of healthcare insurance on which many of us will rely as we enter the retirement years, work.

But Medicare is far from a total solution to a retiree's healthcare needs. A typical couple entering retirement at age 65 can expect to pay well over $200,000 out of pocket for care of one sort or another throughout the rest of their lives.

Ann Kayrish, Medicare expert for the National Council on Aging (NCOA) works in her office on President Trump's administration's new and highly touted online tool for seniors to find Medicare prescription drug plans. (Photo: AP Photo/Cliff Owen)
Ann Kayrish, Medicare expert for the National Council on Aging (NCOA) works in her office on President Trump's administration's new and highly touted online tool for seniors to find Medicare prescription drug plans. (Photo: AP Photo/Cliff Owen)

What is medicare?

Medicare is the nation's largest health insurance program, providing high-quality health care to people 65 and over (as well as limited other groups of disabled people). Medicare is administered by the Centers for Medicare and Medicaid Services (CMS), part of the Department of Health and Human Services (HHS).

The different parts of Medicare help cover specific services:

Part A

Medicare Part A (hospital insurance) helps cover inpatient care in hospitals and skilled nursing facilities, hospice, and home health care. Most people pay no premium for Part A coverage. There is a significant deductible, as well as a co-payment for hospital stays of over 60 days.

Part B

Medicare Part B (medical insurance) helps cover the services of physicians and other healthcare providers, outpatient care, durable medical equipment, and home health care. Part B also helps cover some preventive services to maintain good health or to keep certain illnesses from getting worse.

There is a premium for Part B coverage. Once a modest deductible has been met, Part B typically covers 80% of approved services, while the remaining 20% is paid by the patient.

Traditional Part A and Part B coverage apply to a large majority of Medicare enrollees. The government directly pays the healthcare provider you select, provided he or she accepts Medicare patients.

Part C

Medicare Part C (also known as Medicare Advantage) is an alternative means of delivering the care and services provided by Parts A and B. Medicare Advantage offers health plan options run by Medicare-approved private insurance companies; i.e., the federal government pays for private health coverage.

Most Medicare Advantage Plans also include the prescription drug coverage offered by traditional Medicare Part D, and some Medicare Advantage Plans may include extra benefits for an extra cost.

Part D

Medicare Part D (prescription drug coverage) helps cover the cost of outpatient prescription drugs solely through private insurance plans. These may be standalone prescription drug plans or a part of a Medicare Advantage plan that offers a prescription drug benefit.

How is medicare paid for?

The parts of Medicare are not all paid for in the same way.

Part A

Part A largely is funded by revenue from a 2.9% payroll tax levied on employers and workers (each pay 1.45%). Beginning in 2013, the 2.9% hospital insurance tax will continue to apply to the first $200,000 of earnings for individuals or $250,000 for couples filing jointly, but will rise to 3.8% on earnings in excess of those amounts. Unlike the Social Security tax, there is no ceiling on the income on which the Medicare tax is paid.

Parts B and D

Parts B and D are funded primarily by premiums paid by Medicare enrollees.

Part C

Medicare Part C (Medicare Advantage), being an alternative means of delivering the services provided by Parts A and B, offers health plans run by approved private insurance companies. In other words, the federal government pays for this private health coverage.

A caveat

Despite the breadth of the various Medicare coverages, there are significant out-of-pocket expenses to be borne by enrollees, such as Medicare premiums, deductibles, and co-payments, as well as dental, hearing, and vision care, none of which are covered by traditional Medicare at all.

More information on Medicare costs can be found at http://www.medicare.gov/your-medicare-costs/index.html.

What is Medigap insurance? Here are the basics

A Medigap policy is a type of private insurance that helps you pay for some of the costs that original Medicare doesn't cover. You must have Medicare Part A and Part B to buy a Medigap policy.

What does it do?

A Medigap policy is health insurance sold by private insurance companies to fill gaps in original Medicare coverage. Medigap policies can help pay your share of the costs of Medicare-covered services, e.g., coinsurance, copayments, and deductibles. Some Medigap policies also cover certain benefits original Medicare doesn't cover.

It's important to understand that Medigap policies do not cover your share of the costs under other types of health coverage, including Medicare Advantage plans or private or group health insurance policies.

Policies must abide by certain laws

Every Medigap policy must follow federal and state laws designed to protect you, and the policy must be clearly identified as "Medicare supplement insurance." Medigap insurance companies in most states can only sell you a "standardized" Medigap policy identified by letters A through N.

Insurance companies that sell Medigap policies don't have to offer every Medigap plan. However, they must offer Medigap Plan A (the most basic plan) if they offer any Medigap policy at all. If they offer any plan in addition to Plan A, they must also offer Plan C or Plan F (the most comprehensive plans).

Each standardized Medigap policy must offer the same basic benefits, no matter which insurance company sells it. In other words a Medigap Plan C policy offered by Insurance Company 1 must offer the same benefits as a Medigap Plan C policy sold by Insurance Company 2.

Therefore, cost and company service are usually the only differences between Medigap policies with the same letter sold by different insurance companies. Fortunately, Medigap policies are guaranteed renewable even if you have health problems; the insurance company can't cancel your Medigap policy as long as you pay the premium.

When to buy Medigap insurance

The best time to buy a Medigap policy is during your Medigap open enrollment period. This is a 6-month period that begins on the first day of the month in which you're both 65 or older and enrolled in Medicare Part B. The advantage of buying during this period is that the insurance company is not permitted to use your health status to deny you a policy or to charge you more for a Medigap policy than they charge someone with no health problems.

If you wait ...

If you apply for Medigap coverage after your open enrollment period, however, insurance companies are generally free to impose medical underwriting requirements to determine if they will issue the policy and at what price.

For more information

There is a chart available here that illustrates how the various plans compare. To understand it, however, there are 3 complicating issues you must be aware of:

  • In Massachusetts, Minnesota, and Wisconsin, Medigap policies are standardized in a different way from the other states.

  • Plans D and G effective on or after June 1, 2010 have different benefits than D or G plans bought before June 1, 2010.

  • Plans E, H, I, and J are no longer sold. (Those who already have one of these can keep it, however.)

In summary, all Medigap plans cover your Medicare Part A co-insurance and hospital costs up to an additional 365 days after original Medicare benefits are used up.

Most plans cover your Medicare Part B co-insurance or co-payment. Beyond those generalities, it is best to consult the chart to compare the features of the various policy types.

Summary of Medicare

We can all expect to be increasingly concerned about our health—and the cost of healthcare—in retirement. The reality is that these costs are likely to increase as we age, and the insurance mechanisms that help us deal with them are complex. There's no way around it.

This article is but a very brief introduction to just some of the issues we'll face in paying for healthcare in retirement. The take-home message here is simply that retired folks, as well as those approaching retirement, must recognize the need to educate and insure themselves appropriately before the need for care arises.

Practical ideas you can start with today

  • Visit www.medicare.gov to learn the details of traditional Medicare, Medicare Advantage, and Medicare supplement insurance.

  • Be aware of upcoming enrollment periods if you are nearing the age of 65.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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